Terminology
Technical Analysis
Financial analysis that uses chart patterns in market data to identify trends and make predictions.
Fundamental Analysis
Fundamental analysis is a method of evaluating the intrinsic value of an asset and analyzing the factors that could influence its price in the future. This form of analysis is based on external events and influences, as well as financial statements and industry trends.
Long
A long position (longing or going long) refers to buying an asset in hopes it moves higher (bullish).
Short
A short position (shorting or going short) refers to selling an asset in hopes it moves lower (bearish). Shorting is technically the borrowing of an asset at current prices to buy it back later.
Cover
To cover a position means to buy back a short. Covering your short simply means you are closing a position by buying the shares you borrowed.
Key Level
A key level is a noteworthy point of price action that isn’t necessarily a level of resistance or support. It’s simply a point of interest or significance with regard to price action.
Spot
Spot refers to the spot price of an asset, which means its current trading price. Spot is often differentiated between the prices of futures contracts that frequently trade at a premium to spot prices.
Basis Point
A basis point is 0.01%. This is an easy way to refer to smaller price movements such as “The S&P is up 20 basis points”. Basis points are often referenced as bps (“bips”).
HOD/LOD
This is High of Day and Low of Day. A simple shorthand for an asset’s highest and lowest price for any given trading day.
Bid Price
The bid price is the price traders are currently bidding a stock at. Every stock has a bid. Let’s say traders are bidding 10.00. Traders can put an order to buy at 10.00, and they will have to wait for a seller to come sell them shares. Alternatively, they can simply buy from a seller who is sitting on the ask at 10.02.
Ask Price
The ask price is the price traders are currently asking to sell the stock at. Every stock has an ask. Let’s say traders are asking 10.02. Traders can put an order to sell at 10.02, and they will have to wait for a buyer to come buy shares from them. Alternatively, they can simply sell to a buyer who is sitting on the bid at 10.00.
Spread
The Spread is the difference between the Bid price and the Ask price. In the above example we have a 2 cent spread.
Market Makers
Market makers create the spread. They are large institutional banks that are both buyers and sellers of a stock. They will post a Bid, and Post and Ask. They create the spread, and the profit by selling shares between the spread. The larger the spreads, the more the market makers can profit
Market Orders
A market order tells your broker to get you shares at current market prices. If you send the order to buy 1000 shares at 5.00, the broker will get you 1000 shares, but since you haven’t said the most you are willing to pay, they may give you shares at a higher price. If you accidentally type in 100000 shares, you may get filled at 5.50 or higher.
Slippage
Slippage is the difference between the price you thought you would trade at, and the price the trade actually went through at. This is the result of fast moving markets, volatile stocks, and spreads.
Limit Orders
A limit order is when you ask your broker to buy you shares and state the most you are willing to pay. A limit order of 1000 at 5.05 will not fill higher than that price. That means if the price moves quickly, you may not get 1000 shares.
Stop Orders
A stop order is an order that will trigger when a stock crosses a certain price. A stop order is used by many traders to reduce risk. They set a stop at their max loss price. If the price crosses that level, the order is automatically sent. Stop orders can be sent as both market orders or limit orders
FOK Order
This is Fill or Kill. This means either you get your entire order filled or the order won’t fill at all. This prevents partial orders from filling.
GTC Order:
This is a Good Till Cancelled. That means the order will stay on the brokers servers until you cancel it.
Level 1
Level 1 is the Current Bid Price vs the Current Ask Price. In the above example, 10.00 x 10.02
Level 2
In addition to understanding Level 1 and the bid/ask, day traders need to understand Level 2. Let’s start by talking about the Bid. If the bid is 10.00, there is a buyer sitting waiting to buy shares at 10.00. But are there other buyers also lined up? By using Level 2 data, we can see buyers at 9.99, 9.98, 9.97, and so on. We may see bids stacked tightly on the Level 2, or we may see them spaced apart such as 9.95, 9.89, 9.74, 9.64. When we see full market depth on both the bid side and the ask side, we are seeing complete Level 2.
Time & Sales
Next to the Level 2 window is typically a Time & Sales window. This will show every transaction that occurs and will list the price, the shares, the route, and the time. This transactions will appear red if they occur at the bid price, green if they occur at the ask price, and white if they occur in between the spread.
Volume
Volume is a measure for the number of shares traded. A stock that trades 1mil shares in a day has a volume of 1mil. Some stocks trade tens of millions in volume each day while others trade just a few hundred thousand shares or less. As we watch the Time & Sales, we are able to see volume.
Relative Volume
Relative volume is one of the most important indicators day traders need to know. It shows how much volume a stock has compared to its average volume for the same period. It acts as a gauge indicating how in play a stock is and the more in play it is, the more likely setups with follow through.
Consolidation
Consolidation refers to price action going sideways. When price is not moving up or down, it is said to be consolidating.
Liquidity
Liquidity refers to the ease with which an asset can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items are less liquid. Penny stocks, having very low trading volume and interest, are generally very illiquid. Indices like SPY or Nasdaq, however, having very high trading volume and interest and thus are very liquid assets.
Margin
When a trader opens a broker account they are given margin. In addition to allow you to trade on borrowed money, they also extend a line of credit to your account for trading. Brokers in the US will always give you 4x leverage which which means if you deposit $100k, you will have $400k in total buying power with $300k margin being borrowed money from the broker. There are no fees for trading on margin during the day, but holding with margin overnight is subject to interest rate fees. This is called the margin rate.
Margin Call
Traders who are issued a margin call are in debt to their broker. The broker will require you to repay the debt and can force you to sell other assets to come up with the money.
Float
Float refers to the number of outstanding shares available to trade. When the company did the initial IPO, they released shares. That number is typically the float, although there are 3 ways the number of shares can change. The float is equal to the supply level. Stocks with limited supply and high demand are the ones that move up or down the fastest.
Covering
To close a short position a trader must “cover” their position. This is buying stocks to cover the shares they borrowed from their broker. Like a long-sided trader, they can scale out of the short position in small increments.
Short Squeeze
This is when a stock suddenly starts moving up, and traders who are holding short positions start buying to cover their position, or their broker covers their position for them because they’ve hit a max loss on their account. This creates an extreme buy/sell imbalance and can lead stocks to making 50-100% moves intraday.
Short Interest
Short interest to the number of shares all traders around the world are currently holding as a short position against the stock. If a company has outstanding shares (float) of 10 mil shares, and 1 mil of those shares are short, the short interest is 10%. When stocks have short interest 30% or higher, there is potential for short squeezes.
Gamma Squeeze
This is when there is a lot of option open interest that drives market makers to hedge their selling of contracts by buying the underlying asset and pushing it higher. Market makers generally like to stay directionally neutral, so if they sell a lot of call options for something like SPY, they will buy a proportionate amount of SPY shares to hedge their downside exposure to those calls. This can lead to a lot of upward pressure on price if there are enough options purchased that drives up price and that is known as a gamma squeeze.
Order Block
An order block is the accumulation of orders from financial institutions and central banks. Order blocks are actually special Supply and Demand zones that are formed when there is a block order. That is where the name order blocks comes from. It is formed by buying and selling of the banks and institutions.